If Iran sells oil...

The Iran nuclear deal has been negotiated, but still needs to be ratified. Regardless of opinions about whether a deal is good or bad, the lift in sanctions that would accompany any deal opens up Iranian oil to the marketplace and changes the economic dynamics in the world as well as the region.

The accompanying surge in oil would almost certainly keep prices down, especially in the short term. Dr. Mansour Moazami, Iran's deputy oil minister for planning and supervision, suggested that Iran's output would reach almost twice the 1.2 million barrels per day that it currently produces. Iran has approximately 158 billion barrels of oil reserves (the fourth-largest known oil reserve in the world) and has a reported production capacity of four million barrels per day. With Saudi Arabia keeping the spigots open and the U.S. still enjoying higher production levels, how could Iranian oil do anything but depress the price even further?

Dr. Moazami is urging a return to OPEC output quotas for individual members instead of the current collective production ceiling of thirty million barrels per day. Saudi Arabia is likely to have none of that, given their strategy of flooding the market in an attempt to force U.S. producers with higher costs out of business. Iran wants individual quotas to increase their potential share.

Matt Smith, the Commodity Research Director at Clipper Data, suggests that Iran has as much as forty million barrels of oil in storage that could be released in the short term, but that it will take time to build up capacity. Smith suggests Iran will end up supplying around an extra 200,000 barrels per day, around 20% of Dr. Moazami's expectations. Morgan Stanley analysts believe the figure will be closer to 700,000 extra barrels per day, tacking on another 6-12 months to an oil price recovery (assuming continued economic improvement).

Oil companies are lining up to at least explore the opportunity with Iran, including Royal Dutch Shell and Eni. It would be a symbiotic relationship for both, as Iran offers readily available and accessible oil, but needs the infrastructure and development investment to bring back full capacity. However, oil companies may be reluctant to commit, depending on the terms of any deal and what sort of "snapback" mechanism is available to restore sanctions if Iran violates the terms.

The Energy Information Administration (EIA) suggests that half of Iran's oil production comes from fields over seventy years old. Iran understands this and has taken some internal steps to correct this, planning to draw up to $4.8 billion off its Sovereign Wealth Fund to develop new oil and gas fields. Even if the oil companies do not commit, Iran will be ready to send more oil into a market already suffering from a glut.

If you were waiting for that energy stock rebound, it will come eventually, but a nuclear deal with Iran could throw the timing off. The pressure will be back on U.S. oil companies with higher costs of production (if it ever really was off of them in the first place). The effect will be multiplied if the world economy starts to slow from fallout from the Greek crisis or other world events, and oil consumption stays lower.

On the positive side, at least cheap gas should stay with us for a while longer than at first expected.

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